Suppose it now issues $250,000 of debt at an interest rate of 10% and uses...
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Finance
Suppose it now issues $250,000 of debt at an interest rate of 10% and uses the proceeds to repurchase 25,000 shares. Assume that the firm pays no taxes and that debt finance has no impact on firm value. Refer to the above table to compute the missing data.
Outcomes
Number of shares
+/-0.1%75,000
Price per share
+/-1%10
Market value of shares
+/-0.1%$750,000
Market value of debt
+/-0.1%$250,000
State of the Economy
Slump
Normal
Boom
Profits before interest
71,500
118,000
179,500
Interest
+/-0.1%$25,000
+/-0.1%$25,000
+/-0.1%$25,000
Equity earnings
+/-0.1%$46,500
+/-0.1%$93,000
+/-0.1%$154,500
Earnings per share
+/-1%$0.620
+/-1%$1.240
+/-1%$2.060
Return on shares
+/-1%6.20
%
+/-1%12.40
%
+/-1%20.60
%
Expected Outcome
Answer & Explanation
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